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Government Scrutinizes Chinese Investment in Paytm amid Regulatory Challenges

11th February, 2024| By Business Desk
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  • The Indian government is examining Chinese foreign direct investment (FDI) in Paytm Payments Services Ltd (PPSL), a subsidiary of One97 Communications Ltd, following regulatory hurdles.
  • PPSL applied for a license from the Reserve Bank of India (RBI) in November 2020 but faced rejection in November 2022 due to non-compliance with Press Note 3 under FDI rules.
  • One97 Communications Ltd (OCL) subsequently applied for approval from the Indian Government for past downward investment into PPSL, in line with FDI guidelines.
  • An inter-ministerial committee is currently evaluating Chinese investments in PPSL, with a decision pending comprehensive examination.
  • Regulatory actions, including the Reserve Bank’s prohibition on Paytm Payments Bank Ltd (PPBL) from accepting certain transactions, further underscore the regulatory challenges faced by Paytm amidst the scrutiny.

The central government is currently scrutinizing foreign direct investment (FDI) from China in Paytm Payments Services Ltd (PPSL), a subsidiary of One97 Communications Ltd, PTI reported citing sources. PPSL, the payment aggregator arm of One97 Communications Ltd, sought a license from the Reserve Bank in November 2020 to operate as a payment aggregator under the guidelines on Regulation of Payment Aggregators and Payment Gateways. However, the RBI rejected PPSL’s application in November 2022, directing the company to resubmit it to adhere to Press Note 3 under FDI regulations.

In response, One97 Communications Ltd (OCL), the parent company of PPSL, applied to the Indian Government on December 14, 2022, for past downward investment from OCL into PPSL to align with Press Note 3 stipulations under FDI guidelines. An inter-ministerial committee is currently examining investments from China in PPSL, with a decision on the FDI issue pending comprehensive evaluation.

Under Press Note 3, the government mandates prior approval for foreign investments from countries sharing land borders with India, including China, to prevent opportunistic takeovers of domestic firms. A Paytm spokesperson clarified that PPSL applied for an online Payment Aggregator (PA) license for online merchants and was asked by the regulator to seek necessary approvals for past downward investment and resubmit the application, as is customary in the licensing process.

During the pending approval process, PPSL continued its online payment aggregation business for existing partners without onboarding new merchants. The spokesperson also noted changes in the ownership structure, emphasizing that the Paytm founder remains the largest stakeholder in the company, with Ant Financial reducing its stake in OCL to less than 10 per cent in July 2023. Consequently, it no longer qualifies for beneficial company ownership, with OCL’s founding promoter now holding a 24.3 per cent stake.

In January, the Reserve Bank prohibited Paytm Payments Bank Ltd (PPBL), an associate company of OCL, from accepting deposits or top-ups in any customer account, prepaid instruments, wallets, and FASTags after February 29, 2024. This decision followed a comprehensive system audit report by external auditors, revealing persistent non-compliance and supervisory concerns in PPBL, prompting further regulatory action.

Earlier, in March 2022, the RBI had barred PPBL from onboarding new customers with immediate effect. Despite attempts to solicit comments from OCL, the query remained unanswered at the time of reporting.